Declining and Costlier Deposits For PSBs: Are the Good Times Over?

Image used for representation only. Shimla - 25 Mar 2023 - Shimla Mall road branch of SBI Bank provides retail banking services.

(Photo: iStock)

Chairing a meeting of public sector banks (PSBs) on 19 August 2024, Finance Minister Nirmala Sitharaman exhorted the “banks to make concerted efforts to garner deposits by conducting special drives”. Earlier, on 8 August, RBI Governor Shaktikanta Das asked the “banks to become innovative in attracting deposits” in current “challenging” times “for banks to raise deposits”.

Aggregative deposit growth has not been that bad. As of 23 August 2024 (excluding the effect of the HDFC merger) deposits grew by 11.3 percent year on year against 12.4 percent a year earlier.

Then why this panic? Is there a significant decline in the growth of PSB deposits?

Growing profits of PSBs have been a major success for the government and the RBI. In 2023-24, the aggregate profits of PSBs have reportedly risen to a record high of Rs 1.41 trillion, ie, 35 percent higher than the Rs 1.05 trillion in 2022-23.

But PSBs have been facing significant reductions in current and savings accounts (CASA) deposits, the cheapest resources for banks. Are the government and the RBI worried about emerging threats to the profitability of PSBs?

Spectacular Turnaround in PSB Profitability

As stated in the Trend and Progress of Banking report (data available up to 2022-23), the PSBs suffered an aggregate net loss of Rs 66,609 crore in 2018-19. They incurred net loss in 2019-20 as well, of Rs 26,015 crore.

The year 2020-21 marked the turnaround in PSB profitability. They reported net profits of Rs 31,818 crore. The PSBs’ net profit increased to Rs. 66,540 crore in 2021-22, and to Rs 1,04,649 crore in 2022-23. Between 2018-19 to 2022-23, the annual profits of PSBs increased by a spectacular Rs 1,71,258 crore.

Two factors accounted for this change fortune. First, the PSBs made fewer provisions for non-performing assets and contingencies. In 2022-23, such a provision was Rs 81,193 crore lower than in 2018-19 and explained 47.4 percent of the higher profits of Rs 1,71,258 crore.

Second, there was an increase of Rs 1,32,427 crore in 2022-23 in the net interest income or NIMs (interest earned minus the interest expended). After accounting for increase in operating expenses, the NIMs contributed Rs 63,477 crore of the increased profits.

The rest of the profit increase was accounted for by higher ‘other incomes’.

A Material Change

PSBs are currently suffering from a double disadvantage in the matter of deposits. First, their deposits are growing at rates lower rate than the deposits of all the scheduled commercial banks (SCBs). Second, there is a -faster run-off in their current and savings account (CASA) deposits, which contributes majorly in the net interest incomes.

The PSBs’ aggregate deposits (Rs 84.86 trillion in 2018-19) grew at a compounded annual growth rate (CAGR) of 8.38 percent to Rs 117.10 trillion in 2022-23. Total deposits of SCBs grew at a higher CAGR of 10.99 percent (from Rs 126.87 trillion to Rs 190.68 trillion) in this period.

The growth of PSBs’ demand/current deposits (on which banks pay no interest) started decelerating in 2021-22 (5.67 percent). In 2023-23, growth declined further to 3.55 percent (from Rs 7.23 trillion to Rs 7.49 trillion).

Growth of PSB saving deposits (which carry interest of 2.70 percent only), after growing at a healthy rate of 13.84 percent in 2020-21, declined to 10.33 percent in 2021-22 and collapsed to only 4.15 percent in 2022-23 (Rs 39.79 trillion).

SCBs had a relatively higher CASA growth during this period. In 2022-23 also, the demand deposits and savings account deposits recorded a growth of 7.81 percent and 4.91 percent respectively.

While this data for 2023-24 is not publicly available as of now (of course the Finance Minister and RBI Governor must be knowing), it seems that PSBs witnessed very low growth in CASA deposits. They have recently asked the government to keep its cash balances with them (in place of the RBI). This confirms the pressure PSBs are facing on the CASA deposits front.

Costly Fixed Deposits Are Growing Faster

Households keep deposits in savings accounts for transactional (payments, transfers, investments etc) purposes. They have, however, been keeping a lot more of their surplus in such accounts for the sake of safety (S), ignorance (I) of options, lethargy (L), and trust (T) in PSBs, together what can be termed as the SILT accumulation function.

With increased digitalisation and ease of mobile banking, people are ensuring more active management of their savings accounts, including the creation of digital fixed deposits.

Corporates, in any case, are suave and smart treasury managers and are reducing balances in their current accounts as much as possible by deploying the surplus in liquid mutual funds or other investment avenues, including fixed deposits.

As a result, while total deposits of PSBs are declining, the term deposits have been witnessing an increasing trend. In 2022-23, PSB term deposits grew by 13.08 percent to Rs 69.81 trillion, much higher than the overall deposit growth of 9.26 percent.

It seems fairly certain that the same trend persisted in 2023-24.

A Tough Challenge

The CASA deposits of banks declined from 43.5 percent in 2022-23 to 41.0 percent in 2023-24, as per a report published by SBI Research.

CASA deposits are, in a way, a tax on poor households, as it is in their savings accounts that a lot of SILT accumulates. The middle class is becoming increasingly proficient in managing their deposits more actively (including shifting their deposits to mutual funds and the share market).

With the poor also becoming more active managers, the PSBs are unlikely to see any reversal in the trend of declining CASA deposits.

How do PSBs grow deposits in such a situation? They can use two options.

One, the banks issue higher interest bearing certificates of deposits (CDs) and commercial papers (CPs) to the corporates. Two, they try to get higher interest fixed deposits. They might actually witness their accountholders converting their CASA deposits into fixed deposits.

Both these options will cost more to the PSBs.

The Beginning of Reversal in Fortunes?

Two contributory factors, ie, higher NIMs and declining provisions for non-performing assets, have peaked.

PSB profitability shot up from 2022-23 as the RBI raised the repo rates by 2.50 percent. The interest rates on personal (including housing) loans, the largest growing segment of bank credit, are linked to repo rates. Repo rates are likely to start declining soon.

While the banks increased interest on their loans, they did not pass on the benefit of higher interest rates to their depositors. The interest on savings deposits was not revised at all. For the last few months, however, in pursuit of higher deposits, PSBs have also been participating in a war for fixed deposits.

Both these developments are going to put significant pressure on NIMs.

Declining provisions for non-performing loans on account of recovery from the IBC process and the turn-around in industry fortune has also run its course. The PSBs made a provision of Rs 1.35 trillion in 2022-23 against the provision of Rs 1.33 trillion in 2021-22.

A reversal in the profitability of PSUs is around the corner.

The PSBs are compliant bankers. They will raise deposits at higher costs to comply with the directions and wishes of the Finance Minister and RBI Governor.

This, however, will only end up hurting their profitability.

(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)